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Calculating Annual Growth Rate of Investment
I'm having problems understanding how to calculate the annual growth rate of
an investment. I have the present values at 5% discount rate for the initial investment and all future-year cash flows. From that I am able to sum up the present values, compare that to the initial investment, and that gives me a total return. Unfortunately, that number isn't all that meaningful since it is not a normalized number. I want to normalize by expressing the return as an annual percentage growth rate. I thought that taking the internal rate of return (IRR) of the present values of the investment plus cash flows would give me that number. But it doesn't appear to work. If I take the number IRR calculates and multiply the investment by (1+IRR)^number of years it does not equate the return I get when I take the sum of the present values and divide by initial investment cost. Let's use a real example. Here are the present values: Initial Investment -$3.25 // I would like to be able to specify any arbitrary start date, not just 1/1/2009. 1/1/2010: +$.177 1/1/2011: +$.1.64 1/1/2012: +$20.40 // includes return of principal as well as a dividend netted together These sum to $20.61 and this is a 634% gain on the initial investment (not normalized for time). When I take IRR for those four numbers above, the return is 115%. How should I be calculating the annual interest rate appreciation for the present values given above? -- Will |
#2
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Calculating Annual Growth Rate of Investment
When I feed those four numbers to IRR, I get 87%. This means your money
slightly less than doubles every year. Doubling would turn 3.25 - 6.50 - 13.00 - 26.00. So 87% looks right to me. What IRR formula did you use? Regarding your request to use dates other than the first of the year, use the XIRR function. Regards, Fred. "Will" wrote in message ... I'm having problems understanding how to calculate the annual growth rate of an investment. I have the present values at 5% discount rate for the initial investment and all future-year cash flows. From that I am able to sum up the present values, compare that to the initial investment, and that gives me a total return. Unfortunately, that number isn't all that meaningful since it is not a normalized number. I want to normalize by expressing the return as an annual percentage growth rate. I thought that taking the internal rate of return (IRR) of the present values of the investment plus cash flows would give me that number. But it doesn't appear to work. If I take the number IRR calculates and multiply the investment by (1+IRR)^number of years it does not equate the return I get when I take the sum of the present values and divide by initial investment cost. Let's use a real example. Here are the present values: Initial Investment -$3.25 // I would like to be able to specify any arbitrary start date, not just 1/1/2009. 1/1/2010: +$.177 1/1/2011: +$.1.64 1/1/2012: +$20.40 // includes return of principal as well as a dividend netted together These sum to $20.61 and this is a 634% gain on the initial investment (not normalized for time). When I take IRR for those four numbers above, the return is 115%. How should I be calculating the annual interest rate appreciation for the present values given above? -- Will |
#3
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Calculating Annual Growth Rate of Investment
I guess it would help if I got my numbers right. The numbers should have
been: F29 ($3.25) F30 $1.77 F31 $1.69 F32 $20.40 But IRR on that gives me 114.8% On the numbers I originally posted IRR is giving me 95%. I am using =IRR(F29:F32). Your number looks about right to me, so I conclude I must be mis-using IRR. Any theories on what is going on there? XIRR is giving a similar (incorrect) result. -- Will "Fred Smith" wrote in message ... When I feed those four numbers to IRR, I get 87%. This means your money slightly less than doubles every year. Doubling would turn 3.25 - 6.50 - 13.00 - 26.00. So 87% looks right to me. What IRR formula did you use? Regarding your request to use dates other than the first of the year, use the XIRR function. Regards, Fred. "Will" wrote in message ... I'm having problems understanding how to calculate the annual growth rate of an investment. I have the present values at 5% discount rate for the initial investment and all future-year cash flows. From that I am able to sum up the present values, compare that to the initial investment, and that gives me a total return. Unfortunately, that number isn't all that meaningful since it is not a normalized number. I want to normalize by expressing the return as an annual percentage growth rate. I thought that taking the internal rate of return (IRR) of the present values of the investment plus cash flows would give me that number. But it doesn't appear to work. If I take the number IRR calculates and multiply the investment by (1+IRR)^number of years it does not equate the return I get when I take the sum of the present values and divide by initial investment cost. Let's use a real example. Here are the present values: Initial Investment -$3.25 // I would like to be able to specify any arbitrary start date, not just 1/1/2009. 1/1/2010: +$.177 1/1/2011: +$.1.64 1/1/2012: +$20.40 // includes return of principal as well as a dividend netted together These sum to $20.61 and this is a 634% gain on the initial investment (not normalized for time). When I take IRR for those four numbers above, the return is 115%. How should I be calculating the annual interest rate appreciation for the present values given above? -- Will |
#4
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Calculating Annual Growth Rate of Investment
My theory on what's going wrong is you're just being careless with the data.
I agree that on the series {-3.25,1.77,1.69,20.40} the IRR is 115% On the numbers you originally posted, one of them was ".1.64". I assumed that this was .164 to match the previous cash flow. Using {-3.25,0.177,0.164,20.40} gives an IRR of 87%. However, you interpreted it as 1.64, as using {-3.25,0.177,1.64,20.40} gives an IRR of 95%. So you are using IRR correctly. Just make sure your data is correct. Regards, Fred. "Will" wrote in message ... I guess it would help if I got my numbers right. The numbers should have been: F29 ($3.25) F30 $1.77 F31 $1.69 F32 $20.40 But IRR on that gives me 114.8% On the numbers I originally posted IRR is giving me 95%. I am using =IRR(F29:F32). Your number looks about right to me, so I conclude I must be mis-using IRR. Any theories on what is going on there? XIRR is giving a similar (incorrect) result. -- Will "Fred Smith" wrote in message ... When I feed those four numbers to IRR, I get 87%. This means your money slightly less than doubles every year. Doubling would turn 3.25 - 6.50 - 13.00 - 26.00. So 87% looks right to me. What IRR formula did you use? Regarding your request to use dates other than the first of the year, use the XIRR function. Regards, Fred. "Will" wrote in message ... I'm having problems understanding how to calculate the annual growth rate of an investment. I have the present values at 5% discount rate for the initial investment and all future-year cash flows. From that I am able to sum up the present values, compare that to the initial investment, and that gives me a total return. Unfortunately, that number isn't all that meaningful since it is not a normalized number. I want to normalize by expressing the return as an annual percentage growth rate. I thought that taking the internal rate of return (IRR) of the present values of the investment plus cash flows would give me that number. But it doesn't appear to work. If I take the number IRR calculates and multiply the investment by (1+IRR)^number of years it does not equate the return I get when I take the sum of the present values and divide by initial investment cost. Let's use a real example. Here are the present values: Initial Investment -$3.25 // I would like to be able to specify any arbitrary start date, not just 1/1/2009. 1/1/2010: +$.177 1/1/2011: +$.1.64 1/1/2012: +$20.40 // includes return of principal as well as a dividend netted together These sum to $20.61 and this is a 634% gain on the initial investment (not normalized for time). When I take IRR for those four numbers above, the return is 115%. How should I be calculating the annual interest rate appreciation for the present values given above? -- Will |
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